Midterm Results Should Ease Corporate Anxiety; Fed to Hike Rates Once in 2019
ATLANTA–The upcoming split control of Congress should somewhat assuage nervousness in the business sector, according to Rajeev Dhawan of the Economic Forecasting Center at Georgia State University’s J. Mack Robinson College of Business.
“Political gridlock is usually tolerated by businesses, and they aren’t expecting rollbacks of the 2017 tax cuts or imposition of new taxes or regulations in the near future,” Dhawan wrote in his “Forecast of the Nation,” released Wednesday, Nov.14.
With midterm elections over, Dhawan anticipates business investment should recover, but the rebound will be muted and affect the future pace of monthly job additions.
“Fall is usually prime time for corporate boards to plan new capital outlays. But sharp ups and downs in stock indices over the past few months will not be conducive to capital expenditures,” Dhawan said. “The damage to CEO confidence is evident in reduced bank loan growth and nonexistent third-quarter investment growth.”
The forecaster said the stock market losses of the last three months also will affect future consumer spending through psychological impacts of lower 401(k) balances.
Despite potential public pressure from the White House, Dhawan expects the Federal Reserve to hike rates in December, then hold firm.
“Money that fled the stock market over the past few months stayed on the sidelines in cash due to political uncertainty,” Dhawan said. “Because it didn’t come to the bond market, the spread between the two-year bond rate and the 10-year bond rate dropped from 60 points in January to only 30 basis points by early November.”
As a result of the tight spread, the Fed must wait until June 2019 to raise rates following the December hike or risk an inverted yield curve, which typically signals a recession.
Dhawan pointed out two factors that could put upward pressure on Treasury yields: the rising fiscal deficit and tax amnesty for repatriating dollars held abroad by corporations.
“I expect the 10-year bond to rise just 70 basis points from today’s levels, which indicates two more hikes,” Dhawan said. “After the December 2018 hike, that leaves one hike in June 2019. By mid-2020 we will start to get below the Fed’s 2.0 percent gross domestic product (GDP) growth rate estimate. That’s why I have rate cuts in 2020, not hikes.”
Highlights from the Economic Forecasting Center’s National Report
- Following strong GDP growth of 3.5 percent in the third quarter of 2018, the fourth quarter also will be above par at 2.9 GDP growth will moderate to below 2.5 percent by late 2019. After expanding at 2.9 percent in 2018, the economy will grow 2.7 percent in 2019 and 1.8 percent in 2020.
- Investment growth will be 6.8 percent in 2018, moderate to 5.1 percent in 2019 and to 3.5 percent in 2020. Jobs will grow at a monthly rate of 209,000 in 2018, 146,600 in 2019 and 100,400 in 2020.
- Housing starts will average 1.262 million units in 2018, fall to 1.259 in 2019 and remain around 1.257 in 2020. Expect auto sales of 17.0 million units in 2018, 16.3 in 2019 and 15.6 in 2020.
- The 10-year bond rate will average 3.0 percent in 2018, 3.7 percent in 2019 and 3.6 percent in 2020 following Fed rate cuts.